Having a reliable base of preventative maintenance contract customers is a smart business strategy for HVAC and Refrigeration service companies. However, this reliable source of revenue is overlooked by many service providers.
Today we’re sharing an interview originally published by BuildOps, a service software company, about the value of maintenance contracts for service providers. The company spoke with Michael Rosone, Vice President of Service and Marketing for Arista Air Conditioning, who has over 30 years of sales and sales leadership experience.
Mike shared some valuable insights and advice for HVAC and Refrigeration service providers about why and how to grow a preventative maintenance contract base.
Why are maintenance contracts so important to the HVAC business?
In my opinion, maintenance contracts are the lifeblood of a service contractor. Maintenance contracts bring in a predictable cash flow, along with additional “pull-through” service or replacement work due to the relationship you establish with the customer over multiple maintenance visits.
With a significant preventative maintenance contract base, you also gain the ability to plan labor and staff more accurately since more of your work is predictable. As an organization that has guaranteed year-round work, instead of hiring and firing seasonally, you can attract the most qualified technicians. Providing this service also gives the contractor the opportunity to purchase parts and materials at better prices because you can predict the quantities of maintenance-related parts and materials that will be used over the course of the year.
How valuable are preventative maintenance contracts when it comes to buying or selling a business?
This is exactly what many HVAC service contractors may overlook. The value of the business IS the maintenance contract base.
If I’m a buyer, I’m obviously looking for a return on my investment. If I see that a potential acquisition has $10 million of revenue in “one-off” repair projects last year, that provides me no reassurance that I could expect similar revenue this year or in any future years.
On the other hand, if the company has a maintenance contract base of $4 million, I can reasonably expect that a majority (90%) of that revenue will reoccur in future years. And, given the company’s historic values or industry averages, I can also calculate reliable predictions for additional pull-through revenue.
As an exit strategy, having a significant maintenance contract base will add to the value of the business and should make the business more attractive to potential buyers.
You mentioned “pull-through” work. Can you explain that in more detail?
Pull-through work is the additional work that is generated as a result of performing maintenance inspections, as well as the work generated through emergency service calls for contract customers.
Pull-through work has the potential to generate anywhere from $1 to upwards of $3 in additional revenue for each dollar of maintenance agreements in place, depending on the type of contract.
So, assuming a contractor has a total contract base of $3 million, and we apply a 2:1 ratio, the potential additional revenue from that contract base would be $6 million.
This underscores the importance of offering maintenance agreements.
And, given that maintenance agreements typically have a much higher gross margin percentage than installation work, the gross profit dollars generated from maintenance agreements can be a significant contributor to the company’s profitability. Would you rather have 24% gross margin on $10 million of non-recurring installation work or 40% gross margin on $9 million of recurring service revenue?
I’m certainly NOT saying that installation work doesn’t have a place in a company’s service offerings. I just want to illustrate the often-overlooked financial value of maintenance agreements.
Given the current state of the economy and talk about a possible recession, how might that impact how the market views maintenance agreements?
One of the aspects of maintenance agreements that I find attractive is that, for the most part, they are recession-proof.
In a down economy, customers may hold off on capital improvements or replacing equipment to avoid a large cash outlay. In that case, making sure that the equipment they currently own is well maintained becomes a higher priority.
A good argument can be made that in a down economy, service providers with a well-established maintenance contract base do better, as customers focus more on assuring that the equipment operates as effectively and efficiently as possible.
Maintenance contracts seem to be the holy grail in this industry! Are there any challenges or difficulties in managing them?
As we have already discussed, there are significant advantages to offering preventative maintenance contracts for an HVAC service company. However, to manage those contractual commitments efficiently and effectively, you MUST be organized.
Having the ability to record the specifics about each piece of equipment in a centralized database is essential. For every contract and equipment item, you’ll need to track the make, model number, serial number, belt and filter sizes, the tasks to be performed on that piece of equipment, its physical location at the customer’s site, the area the unit serves, the frequency of inspections, and the number of hours per inspection.
It is also important to have a good procurement process for assuring that the materials needed for all the contractual commitments each month are sourced in time prior to dispatching.
Another challenge is labor planning. It is important to know how many hours are committed each month to maintenance inspections so you can allocate the necessary number of technician hours to fulfill those obligations.
Contract-related labor also needs to be properly balanced with the additional labor demands that are driven by seasonality. A week of 95-degree weather is going to increase the demand for emergency repairs. You’ll need to strategize and plan how to best allocate your available workforce during the peak season.
What advice do you have when starting a maintenance program or division?
The easiest way to begin to establish a contract base is to approach all the customers you are currently doing business with or have previously done work for.
This is the lowest hanging fruit. You already have a trusted working relationship with the customer. You may even have a detailed list of their equipment.
My experience has been that most customers understand the concept of maintenance. They may not know the complexities of their equipment or what’s needed to keep it working properly, but they realize on some level that it needs to be taken care of. That’s why your existing customers are a captive audience and a good jumping-off point for establishing a maintenance base.
How important is the actual maintenance agreement itself?
Along with having a sound infrastructure to support executing the work, a well-designed contract is absolutely critical. Your contract must clearly articulate what is and what is not covered by the agreement.
A maintenance agreement is a legally binding contract. So, along with documenting the tasks you will perform on the equipment, it must contain the proper protection and exclusions necessary to protect your business.
I believe the agreement should be transparent and written in layman’s terms. And I highly recommend discussing it in detail with each customer prior to signing.
It is better to have a mutual understanding upfront (prior to any services being performed or money being exchanged) than to have lawyers interpreting what you intended or the customer expected after the fact.
Thanks to BuildOps, providers of service software built for commercial HVAC, Plumbing, and Electrical contractors, and to Mike Rosone of Arista, for giving us permission to share this interview.
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